The monthly poll, which tracks the Bank of Japan’s closely watched tankan quarterly survey, found the mood among manufacturers was expected to brighten over the coming three months but service-sector morale was seen deteriorating, a worrying signal for the domestic demand-led recovery.

The Reuters poll of 544 large- and mid-sized companies, in which 259 firms responded on condition of anonymity, comes after Japan posted in the fourth quarter its longest run of economic growth since the 1980s boom, led by solid private consumption.

However, the recent global stock market sell-off has boosted investors' appetite for the safe-haven yen JPY=, which is a worry for policymakers.A strong currency eats into Japanese manufacturers' profits and could disrupt the virtuous cycle of business investment, consumer spending and growth that authorities have struggled to set in motion.

“Our consolidated profits have deteriorated because of a strong yen,” a manager of a transport equipment maker wrote in the survey.

A metal product maker said: “We are suffering from the repercussions of China’s environmental regulation and restrictions on natural gas supply, which have severely affected manufacturers.”

Some other companies complained about profits being squeezed by rises in oil and commodity prices, while others said they were benefiting from brisk demand for semiconductors and cars.

The sentiment index for manufacturers stood at 29 in February, down from the previous month’s 11-year high of 35, the survey conducted Jan. 31 to Feb. 14 found.

The index is expected to rise slightly to 30 in May.

The service-sector index held steady at 33 in February, weighed by retailers, with heavy snow in some parts of Japan and widespread cold weather seen discouraging shopping.